Unless the context otherwise requires, the "Company" or "we" shall mean LaBranche & Co Inc. and its wholly-owned subsidiaries.

This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the "2008 10-K") and our Condensed Consolidated Financial Statements and the Notes thereto contained in this report.

Executive Overview

For the third quarter of 2009, we reported an after-tax net loss of $8.9 million, or $0.17 per share compared to a net loss of $5.6 million, or $0.09 per share, for the 2008 third quarter. These GAAP earnings were affected by a pre-tax unrealized gain of $5.1 million on the Company's shares of NYSE Euronext Inc. common stock (the "NYX shares") in the most recent quarter and an unrealized loss on our NYX shares of $31.9 million one year ago. Excluding these items in each quarter, our pro-forma net loss for the third quarter of 2009 was $12.0 million, or $0.22 per share, compared to pro-forma net income for the third quarter of 2008 of $13.6 million, or $0.22 per share. Our pro forma loss in the third quarter of 2009 also included approximately $2.0 million in non-cash expenses.

Consistent with the first half of this year, substantially all of our losses from operations are attributable to our options market-making business. These losses are attributable to distinct conditions in each quarter. In the first quarter of 2009, our options trading losses were caused by the unwinding of significant positions of our former options trading team with longer expirations to manage risk exposure in our portfolio. In the second quarter 2009, our options trading losses were generated from a market penetration strategy in which we increased trading in order to recapture order flow that we did not participate in during the transition period between options trading teams. We believe the trades we executed were important to reestablish our position in the market as a liquidity provider as well as to generate more order flow and opportunities. The losses of our options market-making business in the third quarter of 2009 were not attributable primarily to our gross trading losses, but instead, were the result of not being able to realize high enough revenues to offset the increased costs associated with trading activities. Such costs include exchange, clearing and brokerage fees, as well as the cost of carrying our positions as noted in the margin interest expense line in our financial statements.

We have taken a series of steps which are intended to reverse the losses in our options market-making unit. One significant step has been to substantially shorten the duration of the options contracts in our portfolio. The current constitution of our options portfolio differs significantly from our portfolio in the first half of 2009 when options contracts with expirations longer than six months represented a much larger percentage of our outstanding contracts. Currently, approximately 80% of the option contracts that remain in our portfolio will be expiring between now and January 2010. When these options contracts expire, it will free up a large portion

of our options market-making capital and, thereby, provide us with considerably more flexibility in determining how we choose to allocate our capital going forward within our options business and our other business lines. We also are proactively changing our options trading strategies so that trades we undertake in the future will better reflect evolving market conditions and give our company the best opportunity to achieve adequate returns on our capital. In addition, we have made changes in senior management of our options market-making division to help us better execute our business plan going forward.

Our traditional cash equity and our international ETF market-making businesses continued to be profitable in the third quarter of 2009 and continue to contribute cash to our bottom-line. However, our institutional brokerage business lost $1.7 million in the third quarter of 2009. We are currently still making considerable investments in the institutional brokerage, investing in personnel in both our equity execution and bank loan businesses. Building a fixed income business such as trading in bank loans is consistent with our strategy of diversifying our businesses away from the traditional cash equities market making business. To date, market making in products such as options and ETFs has been profitable at our company. We will seek to focus on areas that allow us to receive returns on capital that compensate us for our market making risks and our operating costs. Despite declining trading volumes in the recent past, we believe our institutional brokerage segment has the potential to find a niche as a service-oriented brokerage business, where our trading expertise and capital base will meet the needs of our customers.

We also believe that our balance sheet and our personnel are valuable assets as our business evolves. Over the years, we have been focused on creating more capital for our company and on using our balance sheet wisely to create substantial tangible book value for our stockholders. Therefore, despite the challenges facing our industry, we have increased our tangible equity to more than $300 million today. Our stock, however, continues to trade at a substantial discount to our tangible equity, even though our liquid assets represent a significant portion of our tangible equity.

Regulation G Reconciliation of Non-GAAP Financial Measures

In evaluating the Company's financial performance, management reviews results from operations, which excludes non-operating charges. Pro-forma loss per share is a non-GAAP (generally accepted accounting principles) performance measure, but the Company believes that it is useful to assist investors in gaining an understanding of the trends and operating results for the Company's core business. Pro-forma loss per share should be viewed in addition to, and not in lieu of, the Company's reported results under U.S. GAAP.

The following is a reconciliation of U.S. GAAP results to pro-forma results for the periods presented:

                                                                          Three Months Ended September 30,
                                                            2009                                                    2008
                                      Amounts as          (1) (2)            Pro forma          Amounts            (1) (2)            Pro forma
                                       reported         Adjustments           amounts         as reported        Adjustments           amounts
Revenues, net of interest expense    $     18,597      $      (5,141 )(1)    $   13,456      $      47,014      $      31,937 (1)     $   78,951
Total expenses                             33,620                 -              33,620             55,881                 -              55,881

(Loss) income before (benefit)
provision for income taxes                (15,023 )           (5,141 )          (20,164 )           (8,867 )           31,937             23,070
(Benefit) provision for income
taxes                                      (6,123 )           (2,056 )           (8,179 )           (3,280 )           12,775              9,495

(Loss) income applicable to common
stockholders                         $     (8,900 )    $      (3,085 )       $  (11,985 )    $      (5,587 )    $      19,162         $   13,575

Basic per share                      $      (0.17 )    $       (0.05 )       $    (0.22 )    $       (0.09 )    $        0.31         $     0.22
Diluted per share                    $      (0.17 )    $       (0.05 )       $    (0.22 )    $       (0.09 )    $        0.31         $     0.22

                                                                           Nine Months Ended September 30,
                                                            2009                                                    2008
                                      Amounts as          (1) (2)            Pro forma        Amounts as           (1) (2)            Pro forma
                                       reported         Adjustments           amounts          reported          Adjustments           amounts
Revenues, net of interest expense    $     45,992      $      (4,734 )(1)    $   41,258      $      32,111      $     144,389 (1)     $  176,500
Total expenses                             90,199                762 (2)         90,961            147,319             (6,005 )(2)       141,314

(Loss) income before (benefit)
provision for income taxes                (44,207 )           (5,496 )          (49,703 )         (115,208 )          150,394             35,186
(Benefit) provision for income
taxes (3)                                 (18,873 )           (2,198 )          (21,071 )          (48,046 )           60,158             12,112

(Loss) income applicable to common
stockholders                         $    (25,334 )    $      (3,298 )       $  (28,632 )    $     (67,162 )    $      90,236         $   23,074

Basic per share                      $      (0.45 )    $       (0.06 )       $    (0.51 )    $       (1.08 )    $        1.45         $     0.37
Diluted per share                    $      (0.45 )    $       (0.06 )       $    (0.51 )    $       (1.08 )    $        1.45         $     0.37

(1) Revenue adjustment reflects (gain) loss in each accounting period, based on the change in fair market value of the Company's NYX shares at the end of each such period versus the beginning of such period.

(2) Expense adjustment reflects the (income) expense associated with early extinguishment of the Company's debt in each accounting period.

(3) In the first quarter of 2008, the Company recognized a tax benefit due to the release of a tax reserve for an expired tax year, which resulted in a reduced provision for income taxes.

New Accounting Developments

See Note 2 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding New Accounting Developments.

Critical Accounting Estimates

Goodwill and Other Intangible Assets

We determine the fair value of each of our reporting units and the fair value of each reporting unit's goodwill under the provisions of ASC 350 (SFAS No. 142), "Goodwill and Other Intangible Assets." In determining fair value, we use standard analytical approaches to business enterprise valuation ("BEV"), such as the market comparable approach and the income approach. The market comparable approach is based on comparisons of the subject company to similar companies engaged in an actual merger or acquisition or to public companies whose stocks are actively traded. As part of this process, multiples of value relative to financial

variables, such as earnings or stockholders' equity, are developed and applied to the appropriate financial variables of the subject company to indicate its value. The income approach involves estimating the present value of the subject company's future cash flows by using projections of the cash flows that the business is expected to generate, and discounting these cash flows at a given rate of return. Each of these BEV methodologies requires the use of management estimates and assumptions. For example, under the market comparable approach, we assigned a certain control premium to the public market price of our common stock as of the valuation date in estimating the fair value of our market-making reporting unit. Similarly, under the income approach, we assumed certain growth rates for our revenues, expenses, earnings before interest, income taxes, depreciation and amortization, returns on working capital, returns on other assets and capital expenditures, among others. We also assumed certain discount rates and certain terminal growth rates in our calculations. Given the subjectivity involved in selecting which BEV approach to use and in determining the input variables for use in our analyses, it is possible that a different valuation model and the selection of different input variables could produce a materially different estimate of the fair value of our goodwill.

We review the reasonableness of the carrying value of our goodwill annually as of December 31, unless an event or change in circumstances requires an interim reassessment of impairment. During the nine months ended September 30, 2009, there were no changes in circumstances that necessitated goodwill impairment testing prior to our required year-end test date. We cannot provide assurance that a change in circumstances requiring an interim assessment or future goodwill impairment testing will not result in impairment charges in subsequent periods. During the first three quarters of 2009 a significant revenue decrease occurred which we do not believe will be a permanent trend. If future revenue estimates are not sufficient to support a BEV in excess of the goodwill, we may potentially be required to impair the value of our goodwill when tested annually at December 31, 2009.

Another of our intangible assets, as defined under ASC 350 (SFAS No. 142), is our trade name. We determine the fair value of our trade name by applying the income approach using the royalty savings methodology. This method assumes that the trade name has value to the extent we are relieved of the obligation to pay royalties for the benefits received from it. Application of this methodology requires estimating an appropriate royalty rate, which is typically expressed as a percentage of revenue. Estimating an appropriate royalty rate includes reviewing evidence from comparable licensing agreements and considering qualitative factors affecting the trade name. Given the subjectivity involved in selecting which BEV approach to use and in determining the input variables for use in our analyses, it is possible that a different valuation model and the selection of different input variables could produce a materially different estimate of fair value of our trade name.

We review the reasonableness of the carrying amount of our trade name on an annual basis in conjunction with our goodwill impairment assessment. During the nine months ended September 30, 2009, there were no changes in circumstances that necessitated trade name impairment testing prior to our required year-end test date. We cannot provide assurance that a change in circumstances requiring an interim assessment or future trade name and stock listing rights impairment testing will not result in impairment charges

in subsequent periods. During the first three quarters of 2009 a significant revenue decrease occurred which we do not believe will be a permanent trend. If future revenue estimates are not sufficient to support a BEV in excess of the trade name, we may potentially be required to impair the value of our trade name when tested annually at December 31, 2009.

Financial Instruments

"Financial instruments owned, at fair value" and "Financial instruments sold, but not yet purchased, at fair value" are reported in our condensed consolidated financial statements, at fair value, on a recurring basis. Pursuant to ASC 820 (SFAS No. 157) , the fair value of a financial instrument is defined as the amount that would be received to sell an asset or paid to transfer a liability, or the "exit price," in an orderly transaction between market participants at the measurement date.

We have adopted Statement of Financial Accounting Standards, or ASC 820 (SFAS No. 157) "Fair Value Measurements," which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 (SFAS No. 157) outlines a fair value hierarchy that is used to determine the value to be reported. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (which are considered "level 1" measurements) and the lowest priority to unobservable inputs (which are considered "level 3" measurements). The three levels of the fair value hierarchy under ASC 820 (SFAS No. 157) are as follows:

Level 1 -   Unadjusted quoted prices in active markets that are accessible at the
            measurement date for identical, unrestricted assets or liabilities;

Level 2 -   Quoted prices for similar instruments in active markets, quoted prices in
            markets that are not active or financial instruments for which all
            significant inputs are observable, either directly or indirectly;

Level 3 -   Valuation is generated from model-based techniques that use significant
            assumptions not observable in the market. These unobservable assumptions
            would reflect our own estimates of assumptions that market participants
            would use in pricing the asset or liability. Such valuation techniques
            include the use of option pricing models, discounted cash flow models and
            similar techniques.

Non-Marketable Securities

The measurement of non-marketable securities is a critical accounting estimate. Investments in non-marketable securities consist of investments in equity securities of private companies and limited liability company interests and are included in other assets or financial instruments owned in the condensed consolidated statements of financial condition. Certain investments in non-marketable securities are initially carried at cost, unless there are third-party transactions evidencing a change in value. For certain other investments in non-marketable securities we adjust their carrying value by applying the equity method of accounting pursuant to

ASC 325 (APB 18). Under the equity method the investor recognizes its share of the earnings and losses of an investee in the periods for which they are reported by the investee in its financial statements. The assets included in this section represent limited liability companies that are service providers and whose value is affected by nonfinancial components. In addition, if and when available, management considers other relevant factors relating to non-marketable securities in estimating their value, such as the financial performance of the entity, its cash flow forecasts, trends within that entity's industry and any specific rights associated with our investment-such as conversion features-among others.

Non-marketable investments are tested for potential impairment whenever events or changes in circumstances suggest that such investment's carrying value may be impaired.

Use of Estimates

The use of accounting principles generally accepted in the United States of America requires management to make certain estimates. In addition to the estimates we make in connection with fair value measurements and the accounting for goodwill and identifiable intangible assets, the use of estimates is also important in determining provisions for potential losses that may arise from litigation, regulatory proceedings and tax audits.

We estimate and provide for potential losses that may arise out of litigation, regulatory proceedings and tax audits to the extent that such losses are probable and can be estimated, in accordance with ASC 450 (SFAS No. 5), "Accounting for Contingencies" and ASC 740 (FIN 48), "Accounting for Uncertainty in Income Taxes". Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different. Our total liability in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, our experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Given the inherent difficulty of predicting the outcome of our litigation and regulatory matters, particularly in cases or proceedings in which substantial or indeterminate damages or fines are sought, we cannot estimate losses or ranges of losses for cases or proceedings where there is only a reasonable possibility that a loss may be incurred. See "Legal Proceedings" in Part II, Item 1 of this Quarterly Report on Form 10-Q for information on our judicial, regulatory and arbitration proceedings.

Recent Regulatory Developments

Regulation SHO and Short Selling Rules.

On July 27, 2009, the Securities and Exchange Commission (the "SEC") made permanent the interim final temporary rule, Rule 204T, that sought to reduce the potential for abusive "naked" short selling in the securities market. The new rule, Rule 204, requires broker-dealers to promptly purchase or borrow securities to deliver on a short sale. The temporary rule, approved by the SEC in the fall of 2008, was set to expire on July 31.

Rule 204 requires that firms buy or borrow securities to close-out any fail to deliver position in an equity security resulting from a long or a short sale by the beginning of regular trading hours on the next settlement day following the date the fail to deliver position arose. In October 2008, the SEC also adopted a rule eliminating the options market maker exception to the close-out requirement for short sales under Regulation SHO and an antifraud rule prohibiting misrepresentations by a "short" seller regarding its ability or intention to deliver securities by the settlement date in connection with both long and short sales. These rules are generally consistent with the series of emergency orders issued by the SEC in September and October 2008. Rule 204 continues certain exemptions and extends the time to deliver securities to cover such short sales by up to two trading days for certain bona fide market makers (such as the businesses encompassing our Market-Making segment) in connection with their bona fide market-making activities. Based on the effects of Rule 204 and interim Rule 204T since October 2008, we do not believe these new regulations has materially affected our business, although we cannot provide any assurance that these regulations will not adversely affect us in the future. We believe that the new rules' exemptions and additional time to cover failed short positions has enabled our market-making business to comply with the new requirements of Regulation SHO while maintaining our market-making and liquidity provision obligations, but cannot provide assurance that these provisions will continue to work for our benefit.

New NYSE Market Model

In December 2008, the NYSE introduced a new market model following the approval by the SEC on October 24, 2008, that resulted in significant changes in NYSE's market structure. The new market model was fully implemented in January 2009, and the changes include, among other things, (a) specialists are now called "Designated Market Makers", or "DMMs"; (b) the alteration of NYSE's priority and parity rules, including those that will allow DMMs to trade on parity with orders on NYSE's display book; and (iii) the introduction of new order functionality, including the DMM Capital Commitment Schedule ("CCS") and hidden orders. In order to achieve parity trading for the DMMs, the new market model eliminated the order-by-order advance "look" specialists received, but the DMM is relieved of their "negative" obligation to not trade for its own account unless reasonably necessary to the maintenance of a fair and orderly market. The role of the designated market maker remains essentially unchanged from the role of the specialist, in that the designated market maker is the primary provider of liquidity and information with respect to the companies it represents on the floor of the NYSE, but without the first look at order flow and without many of the negative and affirmative obligations to which we were subject prior to the new market model. The NYSE has stated that this change gives the DMM greater freedom to manage the trading risks associated with their reduced responsibilities to the NYSE market. In addition, DMMs will continue to be able to generate orders through an algorithm that interacts directly with the NYSE's display book. Furthermore, the DMMs will be able to commit additional liquidity in advance to fill incoming orders via the CCS, which is a liquidity schedule setting forth various price points where the DMM is willing to interact with incoming orders. The new market model was fully implemented on January 1, 2009. We believe we have completed the transition to the new market model, but we expect that our participation in this new market model will continue to evolve and change over time.

Results of Operations

Market-Making Segment Operating Results



                                                                                                     Three             Nine
                                                                                                     Months           Months
                                       For the Three Months            For the Nine Months          2009 vs.         2009 vs.
                                        Ended September 30,            Ended September 30,            2008             2008
                                                                                                   Percentage       Percentage
(000's omitted)                         2009           2008           2009            2008           Change           Change

Revenues:
Net gain on principal transactions   $    4,366      $  84,089      $  14,880      $  188,242           (94.8 )%         (92.1 )%
Commissions and other fees               10,068          3,920         31,381          13,029           156.8            140.9
Net gain (loss) on investments            6,224        (30,489 )        4,718        (136,962 )         120.4            103.4
Interest income                              31         15,195          1,944          59,071           (99.8 )          (96.7 )
Other                                       925          1,157          2,989           2,304           (20.1 )           29.7

Total segment revenues                   21,614         73,872         55,912         125,684           (70.7 )          (55.5 )
Fixed interest on debt                       -              -              -              175              -            (100.0 )

Inventory financing                       5,269         23,834         16,356          75,447           (77.9 )          (78.3 )

Revenues, net of interest expense        16,345         50,038         39,556          50,062           (67.3 )          (21.0 )

Operating expenses                       22,100         45,564         56,228         113,282           (51.5 )          (50.4 )

. . .